A pension fund manager is considering three mutual funds. The first is a stock f

Question

A pension fund manager is considering three mutual funds. The first is a stock fund, the second is a long-term government and corporate bond fund, and the third is a T-bill money market fund that yields a sure rate of 5.4%. The probability distributions of the risky funds are:

What is the expected return and standard deviation for the minimum-variance portfolio of the two risky funds?

A pension fund manager is considering three mutual funds. The first is a stock fund, the second is a long-term government and corporate bond fund, and the third is a T-bill money market fund that yields a sure rate of 5.4%. The probability distributions of the risky funds are:

Explanation / Answer

Expected Return Standard Deviation Weight Weighted return = weight * expected return    Stock fund (S) 15% 44% 0.421934 0.06329    Bond fund (B) 8% 38% 0.578066 0.046245 Sum of weight = 1 10.95% =Expected return of portfolio    The correlation between the fund returns is .0684. Portfolio standard deviation= (wA^2*(RA)^2 + wB^2*(RB)^2 + 2*(wA)*(wB)*(RA)*(RB)*CORR(a,b))^(1/2) 29.71%

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